We recently wrote that critics, including Judge Jed Rakoff, have been questioning the SEC’s policy of increasingly bringing enforcement actions in its administrative forum rather than federal court. We noted that several cases had been filed recently that challenged the constitutionality of the SEC’s administrative proceedings. The first of those cases has now been decided: In Chau v. SEC, Judge Kaplan of the U.S. District Court for the Southern District of New York ruled that the court lacked subject-matter jurisdiction to hear an action to enjoin an SEC administrative proceeding on constitutional grounds.
Critics Question SEC’s Increasing Use of Administrative Enforcement Proceedings
The SEC is increasingly bringing enforcement actions in its administrative forum rather than federal district court, setting the stage for a legal and policy battle over this tactic.
The SEC’s approach has been made possible by a series of legislative enhancements to the agency’s enforcement powers that began with the passage of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. The result of these enhancements has been to greatly expand the remedies available to the Commission in an administrative proceeding beyond its traditional tool, the cease and desist order. The latest expansion occurred with the passage of the Dodd-Frank Act in 2010, which authorizes the Commission to seek civil money penalties against non-regulated persons or entities (i.e. not associated with investment advisors, brokerage firms, and other registered entities). Prior to Dodd-Frank, the SEC could file such actions only in federal court. This new enforcement authority gives the SEC a powerful incentive to bring more cases in the administrative forum.